11.12.18 | Play me or trade me.

By Jessica Sier 2 December 2018 4 min read

Here are some absurd and brilliant things sold on Trade Me in the last few years:

● Seats on a couch to watch a delayed rugby game;

● A 30 tonne rock called “Rocky” that smashed into someone’s house during an earthquake in Christchurch;

● A 60 second hug;

● Two captured ghosts in bottles; and

● A wedding dress worn by mistake by a woman who claimed to have recently lost 90kgs worth of baggage and suggested the dress was so stunning it would distract the buyer from the fact they were marrying a compulsive liar.

A compelling listing.

We could all be forgiven for thinking Trade Me is just the Gumtree (or eBay) of New Zealand.

But it’s not just one marketplace business, it’s four.

The everyday things marketplace is the most established and after a few tough years, has managed to start growing again at around 1.3 per cent over the last financial year. It generates $NZ70 million in revenue.

Trade Me also has a motors business - where you can buy and sell cars, boats, and aircraft - which is growing at around 13 per cent a year and delivers revenue of NZ$70 million.

There’s also a property business that is growing at 10.2 per cent per year and delivering NZ$38 million in revenue.

And a jobs business that’s growing at 14.1 per cent per year and delivering NZ$28 million in revenue.

Spaceship holds shares in Trade Me in its Spaceship Universe Portfolio, and we like it because it generates solid cash flow (which we reckon it will keep doing in the future, see last week) and has been really good at keeping the competitors out.

But it might vanish from the Spaceship Universe Portfolio soon because Trade Me is the subject of a bidding war and may no longer be listed on a stock exchange!

A bidding war is when an outside company publicly announces they’d like to buy up all the outstanding shares for a price.

And then another company comes along and says they’d like to buy all the shares for a higher price.

And then they duel.

And then they perform due diligence, which is a comprehensive appraisal of the business and establish what the assets, liabilities and commercial potential should be worth and then see who is prepared to pay the most.

In the case of Trade Me: two large private equity firms have made bids for the company.

British private equity house APAX Partners made an indicative bid of $NZ6.40 a share on November 22, valuing Trade Me at around $NZ2.54 billion. That was about 25 per cent higher than the price at which the shares had been trading just before the announcement.

On December 5, US private equity player Hellman & Friedman put in a rival $NZ6.45 a share bid, valuing Trade Me at about $2.56 billion.

Now these two bids are only 5 cents per share different in price, so not really a lot in the grand scheme of things.

And absolutely-no-offence-intended-at-all-New-Zealand-is-fantastic-and-its-people-are-fab-and-freaky, but honestly, why is Trade Me attractive to global private equity guys?

Especially since private equity is known for buying businesses, stripping out all the ‘dead weight’ and moulding them into streamlined businesses and then reselling them?

(Private equity is also known for buying a business, breaking it up into parts and then flogging off the parts).

We can’t know the answer just yet, but when we look at Apax Partners we can see it already owns seven of these types of online classifieds and marketplaces.

And the notion of absorbing another cash-flow positive, monopoly-type business into its stable is clearly quite attractive.

Trade Me was founded in 1999 by a guy called Sam Morgan, who sold it in 2006 for $NZ750 million to Fairfax.

Morgan made $NZ227 million out of the deal and became one of the richest Kiwis overnight.

In 2011, Fairfax listed Trade Me on the Australian Stock Exchange as well as the New Zealand Stock Exchange. (And the Spaceship Universe Portfolio holds shares listed on the ASX).

It came on the market at $NZ2.70 a share and as of this week, it’s trading at $5.87.

Trade Me is particularly attractive as it has a round-the-clock ‘trust team’ that make sure out of the 300,000+ trades that happen each week, only around 100 don’t function properly and of that, only 25 are fraudulent.

Also, because it’s listed on two exchanges the private equity firm can reportedly strip out around $NZ2 million of compliance costs when it takes the business private.

And lastly, the firms will look at the synergies and the evolving face of local e-commerce. One of the most difficult aspects for retailers and e-commerce businesses are establishing ways to compete or at least coexist with the likes of Amazon, Alibaba and Facebook all snap up market share.

Now we can’t know for sure, and there’s a fair bit of work still to do on any deal, but it’s a great story of a company that went from a guy with a laptop, and an investment from his friends and family, to a multi-billion dollar business.

This is one of those scenarios where we’d actually like Trade Me to stay listed! It makes a tidy amount of money!

But, if something has to get taken over, then it may as well be for a premium!

Words by
Jessica Sier Right Chevron

Jessica Sier is a financial journalist who currently heads up Spaceship's content. Prior to that she was a reporter at the AFR where she discovered breaking down financial bulls**t was a public good.

11.12.18 | Play me or trade me.